Supply and Demand and Frequent Buyer Program

Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 3 (1010 words) Published: April 28, 2013
Chapter 2
Problem 16:
You are an assistant to a senator who chairs an ad hoc committee on reforming taxes on telecommunication services. Based on your research, AT&T has spent over $15 million on related paperwork and compliance costs. Moreover, depending on the locale, telecom taxes can amount to as much as 25 percent of a consumer’s phone bill. These high tax rates on telecom services have become quite controversial, due to the fact that the deregulation of the telecom industry has led to a highly competitive market. Your best estimates indicate that, based on current tax rates, the monthly market demand for telecommunication services is given by Qd =250 - 5P and the market supply (including taxes) is Qs = 4P - 110 (both in millions), where P is the monthly price of telecommunication services. The senator is considering tax reform that would dramatically cut tax rates, leading to a supply function under the new tax policy of Qs = 4.171P - 110. How much money would a typical consumer save each month as a result of the proposed legislation? Answer:

Before: 250 – 5P = 4P – 110 => 9P = 360 => P=40
After: 250 – 5P = 4,171P -110 => 9,171P =360 => P = 39,25 The average customer saves 0,75 dolars.

Problem 19
Rapel Valley in Chile is renowned for its ability to produce high-quality wine at a fraction of the cost of many other vineyards around the world. Rapel Valley produces over 20 million bottles of wine annually, of which 5 million are exported to the United States. Each bottle entering the United States is subjected to a $0.50 per bottle excise tax, which generates about $2.5 million in tax revenues. Strong La Niña weather patterns have caused unusually cold temperatures, devastating many of the wine producers in that region of Chile. How will La Niña affect the price of Chilean wine? Assuming La Niña does not impact the California wine-producing region, how will La Niña impact the market for Californian wines?

Answer: Since the...
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